Putting the “C" in CRA

As Congress debates value of lending law, banks go about the business of reinvesting

When local electric company officials needed to fill an important position,
they hoped to lure a top-notch young professional for the job. But like
many employers in small towns, the Velva, N.D., company knew it would
have to do more than just sell the job, it would also have to sell the
community. With a population of just under 1,000, the north central
North Dakota town has enough trouble keeping its own youth at home,
let alone attracting outsiders.

In the end, when the applicant decided to accept the position, near the top of the candidate's list of reasons for choosing the job was Velva's library, a new facility that houses over 30,000 volumes and provides access to the Internet and to other electronic research services. Librarian Iris Swedlund tells that anecdote with more than a little pride; after all, she says, for most small towns a library is an afterthought. Most rural towns do not consider their library an economic development tool.

But every rural town obviously considers its bank a development tool, and the Peoples State Bank of Velva, like many other businesses and civic groups in the community, played a big role in the town's effort to build the new library. "It was quite a communitywide effort," says Linda Beall, vice president of Peoples State Bank, but she acknowledges the importance of a local financial institution for such a project. "The bank was a driving force in putting it together and getting it off the ground."

Banks, both large and small, have always taken an interest and a lead in community
development efforts. This issue of the fedgazette highlights
some of those efforts while also considering the impact of the
Community Reinvestment Act (CRA), the 1977 law that requires banks
to lend within their market area.

Do banks lend because of CRA or regardless of the law?

This summer, politicians and lobbyists in Washington have been vigorously
debating the merits of reforming CRA. The law has always been considered
meddlesome by the banking industry, particularly by smaller banks, which
argue that they already lend throughout their entire communities, otherwise
local economies would decline and the banks themselves would suffer.

The current political debate involves a deregulation bill that would end the ability of community activists to block banks with bad community-lending records from obtaining regulatory approval for mergers, acquisitions and other transactions. Instead, a bank's community-lending record would be included in regulators' overall examination of bank management, conducted every 18 months or so. This proposed change to CRA is more sweeping than recent callswhich have received the support of some federal regulatorsto exempt small banks from CRA oversight.

The White House has threatened a veto of the proposed deregulation, and bank industry support for the bill is unknown due to amendments that complicate banks' attempts to gain a foothold in the insurance industry; so the fate of the bill is uncertain.

Community groups, of course, are concerned about the proposed changes. One of the best things about CRA is that it has helped to inform the public about the role of banks and the special lending programs that may exist, says Marvin Kamp, acting director of the Wisconsin Rural Development Center, a private, non-profit organization formed in 1983 to aid small farmers and rural businesses. But after nearly 20 years of CRA regulation, many people and groups are still unaware of what CRA is and what it can mean to their communities, Kamp says. Absent strong CRA enforcement, Kamp says awareness of community lending opportunities will slip.

"I'm one of those bankers who doesn't mind CRA," says Paul Fehrenbach, community reinvestment officer with Marshall & Ilsley Corp., a Milwaukee-based bank holding company with $12.6 billion in assets. "I believe that there was underinvestment in the 1960s and '70s." But Fehrenbach also believes that because of CRA a new era in community lending has developed, whereby banks are more aware of the needs of their communities and of the profit-making potential of lending to all segments of the community. Also, he says some consumer groups use CRA as a weapon to intercede only when a bank plans a merger or acquisition. Those groups should approach banks on a regular basis, he maintains, because banks are willing to listen and learn about possible markets or opportunities they may have overlooked. (The Wisconsin Rural Development Center and Marshall & Ilsley have completed an agreement on a rural development loan program.)

Community lending is nothing new

Regardless of the current debate over the law, and whether their actions
are driven by CRA or by their own banking philosophy, banks continue to do
the work of community lending.

"Throughout the state, banks are providing scholarships, sponsoring community events, organizing fundraising efforts for community causes and helping revitalize Main Street," says James Schlosser, executive vice president of the North Dakota Bankers Association (NDBA). Like many state banking associations, the NDBA sponsors an annual program that awards banks for contributions made to their community, including efforts beyond typical lending programs. Banks also make annual cash donations to organizations and projects in their communities, Schlosser says, and bank employees, like many other businesses, volunteer their services to local charities and organizations.

Those different levels of involvement, from financing to cash donations and employee time, are the marks of many bank projects. In Velva, where the community built one of the country's only public libraries that is shared by the city and the school district, People's State Bank donated $10,000 toward the $760,000 project. Also, the bank arranged for financing of two additional classrooms, and because it committed to purchase a large block of the $465,000 bond issue, the school district was able to receive a lower interest rate. Additionally, bank employees participated in a variety of fundraising activities, including the submission of the bank project to Midwest Living magazine's Hometown Pride Award, which garnered a $1,000 prize that was donated to the library.

Peoples State Bank and the local library have a long relationshipuntil 1928 the library was located in the second floor of the bank building, and through the years the bank has donated funds, equipment and other material for the library. The bank annually donates funds for 150 magazine subscriptions, as well as a number of new books. Along with its electronic connection to research services across the globe, Velva's library has become a popular research location for many students in neighboring small towns, as well as Minot, which is about 20 miles away. Peoples State Bank's Linda Beall says that Velva is growing, and two of the reasons are the town's school district and its proximity to Minot. "A strong school system with modern facilities is a major asset to a community," she says.

In Huron, S.D., as in many South Dakota communities experiencing strong economic growth, one of the major challenges is not just trying to sustain that growth, but to accommodate it with adequate housing. Lynn Schneider, president of Farmers and Merchants Bank and president of the South Dakota Bankers Association, admits that low unemployment rates and low vacancy rates on existing housing stock are good problems to have, but they are real issues nonetheless.

To address the housing issue, four Huron financial institutions have gathered their resources to launch an experiment in housing finance and development, Schneider says. Last year, state officials worked with the city of Huron to apply for use of Community Development Block Grants (CDBG) for the development of a new housing division. The funds were approved and went toward development of the infrastructure for the 120-lot section, about one-fifth of which are dedicated to lower-income families.

The four financial institutions have pooled up to $300,000 for the project. Construction began this summer and the first homes could be ready this fall or next spring. Already 13 lower-income families have contracts for homes. This is the first time CDBG funds have been used in South Dakota to build homes; normally the grant money is used for business or civic purposes, Schneider says.

"This is an example of local banks, with a local banking philosophy, working together," Schneider says. "It's an example of a good, creative approach." And it's also an example of how banks do their jobs, he says, regardless of federal regulation. The fact that most banks over the years have received satisfactory ratings or better may mean that banks have been working hard to meet CRA requirements, Schneider says, or it may also mean that banks are just going about their normal business. Hindsight, he says, shows that CRA was not needed because banks were doing their job. "The intent or spirit of CRA is the banks' bread and butter."

That doesn't mean all banks are necessarily doing their job. "There may be some banks that are better than others, but that gets back to a human factor," Schneider says, and the market has a response for poor performance. "If a banker is only worried about his bank and not the community, he's biting his own tail." If the community doesn't succeed, neither will the bank, he says.

High expectations warranted

DeWayne Streyle, president of the Farmers State Bank of Leeds,
N.D., says it is appropriate for communities to have high expectations
of their banks. "Economic development doesn't flourish without
an aggressive bank," he says. "But I don't think that more is
expected of us than we expect of ourselves."

Streyle's bank is the only one serving the 650 people of Leeds, plus about 900 more in the surrounding region, and while conditions have improved in that northeastern North Dakota community over the slump of the mid-1980s, Streyle says new job growth is important if the town hopes to remain vibrant. "It is imperative that we reverse the long-standing pattern of out-migration of our youth through the creation of primary and secondary jobs," Streyle says.

To that end, Farmers State Bank took a lead role in the formation of the Farmers Choice Pasta Co., a pasta manufacturer owned by about 400 durum farmers that begins production this summer and will eventually employ about 60 in its $20 million plant. Farmers Choice will manufacture specialty pasta products. Farmers State Bank donated $5,000 toward the initial feasibility study for the plant, and provided all phone service, printing supplies, travel expense and organizational meeting expense during the initial phase of the project.

After a board of directors was appointed for Farmers Choice, the bank remodeled and refurbished a former drug store building owned by the bank and donated it to Farmers Choice, which will continue to use it until its office facilities are completed in 1996. The bank made $2 million available for grower equity financing and worked with the Bank of North Dakota to provide grower equity loans. Also, before the pasta plant could be built, the city had to expand its industrial park, which meant not only a land purchase but also development of infrastructure. The bank provided $200,000 in low interest financing for the expansion.

Two other businesses have recently openedor reopenedin
Leeds, and although they didn't grab the headlines like the new
pasta plant, they are both important to the community, Streyle
says. In one case, a young couple moved from Oakland, Calif.,
and left behind their two-hour commute to reopen the Main Street
hardware store. A relative of the local grain elevator operator
told the couplethe woman is a native of Max, N.D.,
about their need for someone to manage the hardware store. She
was persuaded to visit, and the bank set up a meeting with local
officials and representatives of a state planning council to consider
ways to finance the deal. Since their arrival last year, the couple
is doing well, Streyle says, "and they are very prominent members
of the community."

The efforts of the bank and the local development group were also instrumental in establishing another young couple in business last year, Streyle says. This effort resulted in the construction of the Leeds Seed House, a seed cleaning and sales business that attracts farmers from the surrounding area, including Canada, who then stay in town to shop, Streyle says.

Such new developments as the formation of the pasta company and the creation of a new seed cleaning business are especially important to a town like Leeds, Streyle says, because they bring added value to an agricultural product. "Those types of businesses are paramount to the survival of the city itself."

Cooperation and education are key elements

One of the most important things that a local bank does in its efforts
to promote economic development is not to just provide financing directly
from the bank, but to review all the available sources of credit, such
as special government programs or pool agreements with other banks,
to make sure that a deal gets done. It's easy to criticize a bank or
banks when a certain deal fails, says Kathryn Polansky, vice president
of NorthCoast Bidco in Marquette, Mich., but usually a bank has checked
out all available optionsat least those they know about.

That's where NorthCoast Bidco comes in, says Polansky. NorthCoast, a wholly owned subsidiary of Shorebank Corp., an Illinois-based bank holding company, is a Michigan-licensed business and industrial development corporation serving the Upper Peninsula of Michigan.

NorthCoast is not a bank, rather, it cooperates with banks and other financial institutions to help meet the credit needs of U.P. businesses. NorthCoast loans are made in conjunction with bank loans, Small Business Administration loans, private or other sources of funding. "The lending is strictly to small business," Polansky says. "In almost every case we leverage traditional financing. We're offsetting risk, it's a very nice little combination for a bank."

Polansky is positive in her assessment of banks' efforts to lend to small businesses. For some banks, the idea of using subordinated debt from NorthCoast, for example, to help finance a business may be new and may cause them to hesitate, but banks are eager to listen and willing to learn, she says.

"I think the banks really do try, but I don't think that they always have the experience or exposure to non-traditional types of lending," Polansky says.

Polansky, who worked for a "megabank" on the West Coast before moving to the UP three years ago, says CRA compliance was important to her former employer. "CRA was big and you paid attention. Everybody crabbed and moaned about it, but I think that they've benefited," she says.

From her experience in the UP, Polansky says she can see how hard the smaller community banks work to improve their cities; even so, she doesn't think banks of any size should be exempted from CRA, if for no other reason than to formalize the education process that is essential for bankers if they expect to know about all the various lending options available.

Education was the impetus behind Community First National Bank's
Financial Forum for Women. The Fargo, N.D.,-based bank holding
company began the program last year to serve the financial and
educational needs of women in the Fargo-Moorhead market through
seminars, programs and newsletters. Although the program was directed
at women of all income levels, including business owners, the
Forum was not an attempt to offer special lending arrangements,
says Kim Ouren, Community First's marketing officerit was
simply to educate women.

Ouren says the Forum began when five employees of the bank, all women, shared a common concern that women were underserved and perhaps underestimated in the financial world. Before Community First held its first seminar, it conducted research that showed, among other findings, that there are over 2,000 women-owned businesses in the Fargo-Moorhead market, that more than half of women think financial advisers treat them with less respect than men, and that more than one-third of women had never made an investment decision and another 28 percent were "not confident" making investment decisions.

Community First used direct mail and other forms to announce the Forum and began a series of "brown bag lunches" at its Fargo headquarters in April 1994. The meetings, which attracted up to 50 attendees for some meetings, ran through February of this year and may begin again this fall, Ouren says. The lunch sessions included such topics as retirement planning, small business growth, investor fraud, teaching money basics to children, and also included some "lifestyle" topics dedicated to health and cooking.

Ouren says that the bank has received inquiries on certain investment
or lending products as a result of the Forum. She says the bank
is pleased by that response, but that the primary goal of the
program was simply to educate women about financial and business
matters. "Another objective," she says, "was to overcome the stereotype
that banks do not consider women important and typically have
not been supportive of women."